Abstract
The Panzar-Rosse test has been widely applied to assess competitive conduct, often in specifications controlling for firm scale or using a price equation. We show that neither a price equation nor a scaled revenue function yields a valid measure for competitive conduct. Moreover, even an unscaled revenue function generally requires additional information about costs and market equilibrium to infer the degree of competition. Our theoretical findings are confirmed by an empirical analysis of competition in banking, using a sample containing more than 100,000 bank-year observations on more than 17,000 banks in 63 countries during the years 1994 – 2004.
Highlights
E MPIRICAL estimates of the degree of competition have been significantly refined by two new empirical industrial organization (NEIO) techniques: the Bresnahan-Lau method (Bresnahan, 1982, 1989; Lau, 1982) and the PanzarRosse reduced-form revenue test (Rosse & Panzar, 1977; Panzar & Rosse, 1982, 1987)
We show that the appropriate H statistic, based on an unscaled revenue equation, generally requires additional information about costs, market equilibrium, and possibly market demand elasticity to infer the degree of competition
For each country in our sample, we estimate the H statistic using three versions of the P-R model: Hr based on equation (1), an unscaled revenue function; Hsr based on equation (3), a revenue function with total assets as explanatory variable; and Hp based on equation (4), a price function with total revenue divided by total assets as the dependent variable
Summary
E MPIRICAL estimates of the degree of competition have been significantly refined by two new empirical industrial organization (NEIO) techniques: the Bresnahan-Lau method (Bresnahan, 1982, 1989; Lau, 1982) and the PanzarRosse reduced-form revenue test (Rosse & Panzar, 1977; Panzar & Rosse, 1982, 1987). The latter method has found widespread application in the literature due to its modest data requirements, single-equation linear estimation, and robustness to market definition (Shaffer, 2004a, 2004b).
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
